“Bailouts are terribly inefficient ways of dealing with companies in distress. Chapter 11 bankruptcies are far better. Chapter 11 could have been used by Lehman Brothers, but Lehman apparently refused to consider it, and chose instead to play a game of “chicken” with the Treasury.

Prior to 1978, a company could seek Chapter 11 protection only if it was insolvent, and Chapter 11 normally meant that a company’s managers would have to relinquish control. In 1978 Congress amended Chapter 11 to delete the insolvency test, and also to allow managers to keep control of a company unless a bankruptcy judge explicitly finds them to be incompetent or untrustworthy.